Investing in mutual funds has become a practical option for many individuals aiming to build long-term wealth. Whether you’re a beginner or someone with experience in the share market, understanding the Net Asset Value (NAV) of a mutual fund is essential. NAV plays a crucial role in determining the price at which you buy or sell mutual fund units.
This article offers a comprehensive explanation of Mutual Fund NAV and its importance in your investment journey. If you’re investing through a SIP or making a one-time contribution, having a clear idea of how NAV works will help you make informed decisions in the dynamic share market.
What is Mutual Fund NAV?
The Net Asset Value (NAV) is the per-unit value of a mutual fund. It represents the total market value of all securities held by the fund, minus liabilities, divided by the number of outstanding units.
In simple terms, NAV tells you the value of one unit of a mutual fund at a particular point in time. It changes every day based on the performance of the underlying assets.
NAV Calculation Formula
The formula to calculate NAV is:
NAV = (Total Assets – Total Liabilities) / Number of Outstanding Units
The total assets of a fund include its investment in securities, accrued income, and any cash held. Liabilities include expenses and obligations that the fund has yet to pay.
Why NAV Matters to Investors
Many investors mistakenly assume that a lower NAV means the mutual fund is cheaper or a better buy. However, NAV should not be confused with stock prices in the share market. A fund with a higher NAV isn’t necessarily expensive, nor is one with a lower NAV a bargain.
NAV primarily serves as a valuation metric. It is used to determine the number of units allocated to an investor when they invest a certain amount. For example, if the NAV of a mutual fund is ₹20 and you invest ₹2,000, you will receive 100 units.
Understanding NAV is especially important for those investing through a SIP. Every SIP installment is used to purchase units at the prevailing NAV on the transaction date.
How Often is NAV Updated?
NAV is calculated and updated at the end of each trading day, after the share market closes. This daily update ensures that investors get a fair value based on the fund’s current holdings. All buy and sell transactions are processed using the closing NAV of that particular day.
Factors Influencing NAV
Several factors influence the movement of a mutual fund’s NAV. Some of them include:
1. Market Performance
NAV rises or falls depending on how the underlying securities perform in the share market. If the prices of the holdings go up, NAV increases. If they fall, NAV decreases.
2. Expenses and Liabilities
Funds incur expenses such as management fees, administrative costs, and other charges. These are deducted before the NAV is calculated, affecting the final value.
3. Income Generated
Dividends received from stocks or interest earned from bonds contribute positively to the NAV.
4. Redemptions and Subscriptions
If more investors redeem their units than new investors coming in, it might impact the fund’s liquidity and NAV in the short term.
NAV and SIP: The Link
When you set up a SIP, your investment amount is automatically used to buy mutual fund units at the current NAV. Since NAV fluctuates daily, the number of units you receive also varies with each installment. This process results in cost averaging — a benefit where you end up buying more units when prices are low and fewer units when prices are high.
This approach reduces the impact of short-term market volatility and encourages disciplined investing over time.
Is a Low NAV Better Than a High NAV?
Many new investors assume that a mutual fund with a lower NAV offers better returns. This is not true. NAV alone does not reflect the fund’s potential or past performance. Two funds with different NAVs can generate the same percentage return over time.
What really matters is how well the fund’s portfolio performs, its consistency, risk level, and alignment with your financial goals.
NAV vs. Market Price: Understanding the Difference
Unlike stocks, which are traded at fluctuating prices during market hours, mutual funds are priced based on NAV, which is fixed once a day. Stock prices are driven by supply and demand, while NAV is strictly a calculation of asset value.
Also, mutual fund units cannot be traded throughout the day like stocks. They are bought or sold at the NAV calculated after the market closes.
Common Myths Around NAV
1. Lower NAV = Cheaper Fund
This is a misconception. NAV reflects the fund’s per-unit value, not its affordability or quality.
2. NAV Affects Returns
The return you earn depends on the performance of the fund’s investments, not on the NAV itself. Whether the NAV is ₹10 or ₹100, a 10% return is still a 10% return.
3. New Funds Offer Better Opportunity
Newly launched funds often have an NAV of ₹10. Some investors believe this is a better entry point. However, it’s important to look at the fund strategy and portfolio rather than just the NAV.
Conclusion
Understanding Mutual Fund NAV helps you make better investment decisions, especially if you invest regularly through a SIP or track the share market actively. While it is a vital metric, it should not be the sole factor influencing your investment choice.
Instead of focusing on whether a fund has a high or low NAV, consider its overall portfolio strategy, risk profile, long-term performance, and how it fits within your financial objectives.In the end, both SIP and lump sum investors benefit from knowing how NAV works. It brings clarity to your investments and strengthens your understanding of how mutual funds operate within the share market ecosystem. Staying informed helps you build a more stable and informed financial future.
Leave a Reply